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RBA sits still while economy transitions

Belinda Merhab

Interest rates aren't likely to be moving for the foreseeable future as the Reserve Bank waits to see how the Australian economy copes with its current challenges.

Mining investment, which has been a major driving force of the Australian economy for much of the past decade, is winding down and is expected to decline much further over the next few years, the RBA said in its quarterly Statement on Monetary Policy on Friday.

What remains uncertain is how to fill that void.

"The key uncertainties for the domestic economy continue to be centred on the timing and extent of the expected decline in mining investment, the associated rise in resource exports and the further strengthening in non-mining activity," the RBA said.

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"While this `transition' has been unfolding for some time, helped in part by the very low level of interest rates, there is no guarantee that the rebalancing of spending will be a smooth process."

CommSec economist Savanth Sebastian said the RBA had plenty of time on its side to sit back and assess how the economy pans out.

In the meantime, super-low interest rates were set to continue, he said.

"The Reserve Bank is seemingly still trying to assess how the transition will occur from declining mining investment to a pickup in non-mining sectors," Mr Sebastian said.

"No surprise that in such an environment policymakers will maintain stable interest rates and watch and see how the economy responds to conflicting forces."

"There is clear disappointment in the clumsiness of the baton-change between mining capex and demand in the domestic non-mining economy," Mr Jarman said.

But another rate cut was unlikely, with JP Morgan expecting the RBA to keep rates on hold before eventually hiking in the second half of 2015.

"This is because rates are already low, and governor Glenn Stevens' view seems to be that lower rates will not cure what ails the Australian economy, which is teething problems associated with a number of large structural adjustments," Mr Jarman said.

Recent softness in some indicators had increased the uncertainty around the strength and timing of a pick-up in non-mining business investment and consumption, the RBA said, although low interest rates and healthy business balance sheets could see a pick-up happen sooner and more strongly than expected.

Consolidation of state and federal government budgets was another source of uncertainty for the economy, the RBA said.

On a positive note, dwelling investment is expected to increase noticeably as a source of economic growth, boosted by low interest rates.

But labour market conditions remain subdued, the RBA said, with the unemployment rate likely to remain elevated for a time and "not expected to decline in a sustained way until 2016".

The central bank repeated its familiar phrase that "the most prudent course is likely to be a period of stability in interest rates".